SEC Uncertainty Looms Over Token Summit – Again

In a widely circulated story, the Waterloo, Ontario, company had promised legal action against an expected regulatory action, but the odds that Kik will pursue that seem to be diminishing, even if the company’s legal expenses are not. Nevertheless, Livingston would prefer the SEC take any action rather than continuing to delay.

“What we’re saying to them is, ‘Stop dragging this out, if you want to go to court, if you think there is an infraction, then let’s go to court,’” Livingston told CoinDesk at Token Summit 2019 in New York City on Thursday.

Livingston’s remarks fell in line with a major theme of the summit itself: regulatory uncertainty.

The topic had also been a major theme last year and at the summit’s prior iteration in San Francisco. In fact, it has felt like the endless conversation in crypto ever since ERC-20 tokens created a new fundraising strategy: selling access to new networks, rather than ownership stakes.

Jae Kwon, of Cosmos, gave a generally positive view of regulators’ efforts, though he still noted gaps. He said it made a lot of sense for regulators to tamp down an ICO market that “wasn’t sustainable.”

An investor in the space, Ash Egan of Accomplice VC, said this continuing conversation about what’s legal is “taking mindshare away.”

He told CoinDesk:

“You have to actually think about: Do you want to engage, like Blockstack is, or do you want to ignore it?”

Courses of action

Playing by the rules is not cheap.

Muneeb Ali of Blockstack took the stage to discuss his company’s Regulation A+ filing with the SEC. The Reg A+ is colloquially known as the mini-IPO and requires much of the same legal legwork.

Token Summit co-host William Mougayar said on stage that he had heard Blockstack had spent as much as $2 million to finalize its filing. While declining to confirm that figure, Ali said he expected that if Blockstack got a qualification for its offering to U.S. investors, then future companies would be able to take the same approach at a lower cost.

“We are considering it a donation to our industry,” Ali quipped.

Faith in Congress?

There are other approaches out there to dealing with regulatory uncertainty.

Many members of the larger crypto community appear to support redefining the terms, offering their support for Congressmen Warren Davidson and Darren Soto and their Token Taxonomy Act, which would exempt certain cryptocurrencies from securities laws.

Soto, a Florida Democrat, spoke briefly via video, urging attendees to press their own representatives to support his legislation:

“As I look to the future of our economy, more and more transactions will be done through cryptocurrency.”

For his part, Ali acknowledged the legislative process currently underway but said his company did not feel it could wait. He also said he couldn’t really conceive of following Kik’s approach and challenging the SEC to a courtroom showdown.

Timothy Massad of the Brookings Institution didn’t seem to believe the bill had much hope anyway.

He said that Soto is the exception among the House Democrats on the legislation because, he believes, most are uncomfortable with how much the bill undermines securities law.

An attorney who formerly helmed the Commodities Futures Trading Commission (CFTC) under President Barack Obama, Massad’s take comes from a Washington insider’s perspective.

He also disagrees with the approach.

“I wouldn’t agree that this industry is different, that it needs a special exemption from securities law,” he said. He conceded, however, that more clarity is needed and the present course, via enforcement actions, hasn’t been the most efficient.

And that’s left a bevy of other problems. One attendee pointed to protocols that suddenly forked themselves. Massad pointed to frontrunning and exchanges with trading desks that use their own customers’ info to make trades.

Massad noted:

“You’ve got all sorts of problems in the cash market for things that aren’t securities.”

Definitional delay

But, on that point, another lawyer on the panel noted there are a lot more issues beyond how the law views crypto.

Robert Rosenblum, an attorney at Wilson SAonsini Goodrich & Rosati, said his firm has typically seen most cryptos as securities. He said that his coworkers have always felt the gap then was, “So, now what?”

In other words, regulators need to explain, if tokens are securities, how the public should buy them and where trading markets can be established.

Kwon of Cosmos made a similar point. He noted that no one has any idea how to run a decentralized exchange in a way that’s OK with U.S. regulators right now. But Rosenblum seemed to feel this would and could be worked out.

“Only after we have a reasonably well-functioning market, will we have more experience, and a much better framework,” Rosenblum said.

How long will that take, though? And that became the underlying question. Slowness tortures a very fast-moving industry.

Andreas Glarner, an attorney with European compliance firm MME, said that the view from Europe is that this entire industry is confused:

“After roughly five years’ time, the answer is: It’s not clear. Otherwise, we wouldn’t be sitting here. That’s the outside view.”

Attorney Nancy Wojtas, a partner at Cooley LLP, said she agreed that the doubts are spurring companies to leave or at least domicile elsewhere, and that’s a concern.

Kwon concurred:

“If the U.S. is not careful, it’s going to lose its ability to participate.”

Additional reporting by Nik De.

William Mougayar and Muneeb Ali at Token Summit 2019, photo by Brady Dale for CoinDesk